Most Effective Ways to Protect Your Directors and Officers from Legal Liability
posted Nov 13, 2015 by Sandy Ross, CPA, CFE in the Mission Matters Blog
Making sure your organization’s directors and officers are protected from legal liability is crucial to ensuring that your nonprofit will not suffer financial collapse. Managing the affairs of a nonprofit organization can fall on its directors and officers as a personal responsibility.
Effort and diligence are essential qualities of effective boards— which requires a significant amount of time. If you neglect this fiduciary duty and a legal claim is made against your organization, all the directors and officers could be held individually liable for those actions in court. Depending on the state, there can also be significant financial penalties involved.
Be aware of these common areas where claims have been made against nonprofit officers and directors:
- Employment practices
- Hiring decisions
- Discrimination against employees
- Wrongful termination
- Sexual harassment
- Injuries during volunteer activities
- Misused/mismanaged endowments and/or donations
- Improper financial oversight
Since most nonprofits do not have funds set aside to mount a legal defense and pay settlements, these risks are particularly threatening. Sometimes cases can cost an organization $1 million or more.
How to protect your organization:
The directors and officers and management team should at a minimum review its insurance coverages and obtain Directors and officers insurance.
Directors and officers insurance
To tackle this issue and provide protection for your directors and officers, invest in Directors and Officers (D&O) Insurance, which can:
- Reimburse the organization for indemnification costs.
- Make payments to directors who are not reimbursed for legal expenses.
- Cover employment cases (about 85% of D & O claims against non-profits are employment-related)
Before you accept a position on a Board make sure that the organization has D&O Insurance coverage.